She laments her experience in Rajdhani Express (a premium rail service in India for connecting major cities with New Delhi). She finds the food given in the Express bland and boring:
Archive for the ‘Behavior Eco/Fin’ Category
He says despite 390 years and usefulness of Prospect theory, its applications have been limited so far (mostly in finance and insurance). However, things are looking better with some researchers looking at applications in other fields:
Prospect theory, first described in a 1979 paper by Daniel Kahneman and Amos Tversky, is widely viewed as the best available description of how people evaluate risk in experimental settings. While the theory contains many remarkable insights, economists have found it challenging to apply these insights, and it is only recently that there has been real progress in doing so. In this paper, after first reviewing prospect theory and the difficulties inherent in applying it, I discuss some of this recent work. While it is too early to declare this research effort an unqualified success, the rapid progress of the last decade makes me optimistic that at least some of the insights of prospect theory will eventually find a permanent and significant place in mainstream economic analysis.
Apart from PT’s applications, paper also explains basics of PT. It has four elements:
An article which gets a huge thumbsup from this blog.
It mentions couple of areas where FinalMile, a firm has used beh eco to nudge citizens into better decisions:
- Prevent people from crossing railtracks (covered earlier as well). Though I would love to see an empirical study on this experiment to back the claims.
- Road safety
Great to know all this and hope to read much more in future..
An amazing paper by Devin G. Pope and Maurice E. Schweitzer. Though, it is highly quant based but one does get some ideas.
They look at professional golfers’ behavior across various situations. And findings are in line with Prospect theory (PT). PT says people are risk averse while making gains and risk seekers while making losses. So when golfers are in a winning position they tend to become risk averse and while in a losing position take higher risks:
Who better than Shleifer to review Kahneman’s tome on psychology and economics.
In this review, I discuss some broad ideas and themes of the book. Although it would be relatively easy to carry on in the spirit of the first paragraph, constrained only by my limited vocabulary of adjectives, I will seek to accomplish a bit more. First, because the book mentions few economic applications, I will describe some of the economic research that has been substantially influenced by this work. My feeling is that the most profound influence of KT’s work on economics has been in finance, on what has now become the field of behavioral finance taught in dozens of undergraduate and graduate economics programs, as well as at business schools. I learned about KT’s work in the 1980s as a graduate student, and it influenced my own work in behavioral finance enormously.
Second, I believe that while KT’s work has opened many doors for economic research, some of the fundamental issues it raised remain work in progress. I will thus discuss what Kahneman’s work suggests for decision theory, primarily as I see it through the lens of my recent work with Nicola Gennaioli and Pedro Bordalo (Gennaioli and Shleifer 2010, Bordalo, Gennaioli, and Shleifer 2012a,b,c)
He says there are two things he wants to clear two objectives on beh eco:
The first objection holds that, while psychological quirks may influence individual decisions at the boundary, the standard economic model describes first order aspects of human behavior adequately, and economists should focus on “first order things” rather than quirks. Contrary to this objection, Della Vigna (2010) summarizes a great deal of evidence of large and costly errors people make in important choices…
The second objection holds that market forces eliminate the influence of psychological factors on prices and allocations. One version of this argument, made forcefully by Milton Friedman (1953) in the context of financial markets, holds that arbitrage bring prices and therefore resource allocation to efficient levels. Subsequent research has shown, however, that Friedman’s argument – while elegant – is theoretically (and practically) incorrect. Real-world arbitrage is costly and risky, and hence limited (see, e.g., Grossman and Miller 1988, DeLong et al 1990, Shleifer and Vishny 1997). Dozens of empirical studies confirm that, even in markets with relatively inexpensive arbitrage, identical, or nearly identical, securities trade at different prices. With costlier arbitrage, pricing is even less efficient.
A second version of the “forces of rationality” objection holds that participants in real markets are specialists invulnerable to psychological quirks. John List’s (2003) finding that professional baseball card traders do not exhibit the so-called endowment effect is supportive of this objection. The problem with taking this too far is that individuals make lots of critical decisions – how much to save, how to invest, what to buy – on their own, without experts. Even when people receive expert help, the incentives of experts are often to take advantage of psychological biases of their customers. Financial advisors direct savers to expensive, and often inappropriate, products, rather than telling them to invest in index funds (Chalmers and Reuter 2012, Gennaioli et al. 2012). Market forces often work to strengthen, rather than to eliminate, the influence of psychology.
Dr. Nutavoot Pongsiri of Bank of Thailand has this nice article on the topic.
He says traditional eco cannot help understand this behavior (Chicago school would disagree). You need help from beh eco and psychology to figure this behavior:
Why do people become shopaholics? We cannot explain this phenomenon using a standard economic framework oriented around efficient allocation and the intersection of the demand and supply curves while ignoring people’s behaviour. Instead, we need to look at behavioural economics and related areas such as behavioural finance and cognitive and emotional factors in understanding the economic decisions of individuals.
People have different ways of dealing with stress and anxiety. Some turn to food, eating their way through a particularly emotional time. However, research released recently by the University of Pittsburgh Medical School, Carnegie Mellon, Harvard and Stanford universities reveals the effect of depression on compulsive shopping. The researchers explain that part of what’s happening when people are depressed is they become sad and self-focused and that may lead them to go shopping and become shopaholics. Just like a drug addict uses drugs, shopaholics use the excessive shopping as a release when things get to be too difficult to handle.
What is the solution?
Behavioural economics seek to explain the phenomena that can lead to becoming a shopaholic. We, therefore, should avoid shopping when feeling bored or depressed otherwise we will end up buying clothes that we never wear or even cut the tags off. In addition, we need to do shopping mindfully with a wide-angle monetary lens. The truth is that it can be hard to rid ourselves of habitual shopping, especially when credit cards are so easily obtainable. If we carry only cash, our payment is tangible. We will actually have to take the time and count how much we are paying at the counter. But using credit cards may add to the temptation to spend more than we can afford as we do not see the full extent of our expenses. In addition, we always need to remind ourselves to shop for ideas and experience not for fun or for comforting our mood. Last, but not least, shopping with someone with bad spending habits will influence our shopping habits. We should go shopping with a friend who often leaves stores empty-handed.
However, things are not as easy as this interview suggests. Cyclists are not wanted by either walkers or car people. Town planners never sure where to place them:
It is interesting to read such papers.
Brigitte Madrian of Harvard says that so far we have sued traditional route to increases savings – matching contributions. With behavioral economics we have more tools like text reminders, simplification, automatic enrollment etc. These latter approaches have a great impact than the traditional approach:
A nice survey by Zakaria Babutsidze of United Nations University.
In this paper I review the evidence from marketing and psychology literature about the purchase behavior of consumers. I concentrate on the characteristics of the choice process, choice of the external information source and nature of the information obtained from these sources. The impact of important systematic differences among consumers and products on choice behavior is also discussed.
Summary is consumers are different (irrational) and complex. They use heuristics and decisions differ across products. On durables, they spend more time gathering information and so on:
Link to the discussion is here. The eight econs in the discussion are:
- Nicholas Bloom
- Raj Chetty
- Gauti Eggertsson
- Xavier Gabaix
- Gita Gopinath
- Peter Leeson
- Glen Weyl
- Justin Wolfers
Chetty, Gabaix, Leeson, argue for using behavioral econ to enrich their studies…Way to go…
Each one lists how to better state of econ…Nice read on forthcoming research from the top young minds
The research in a way is quite similar to Daniel Kahneman’s research. But the stress on unconscious mind is quite a read.
Martha Lagace: What do you mean by unconscious thought?